The Pros and Cons of Franchising

by Startacus Admin

Franchising is a tempting proposition. You own your own business while gaining instant access to existing brand awareness and trust. All you have to do is sit back and watch the money roll in, right? Unfortunately it’s not quite as simple as that, and can be just as much hard work as starting any other business, as perhaps suggested by the fact that not every other person you meet owns a McDonald’s. So let’s weigh up some of the pros and cons.

Pro - Big name

This is the obvious one. Open a Subway or a Domino’s (food franchises are by far the biggest), and people will be lining up before the paint has dried on the walls. The business has been proven over and over, all around the world, and people know exactly what to expect - no one is going to wander past thinking ‘I wonder what that is.’ Equally, most people will choose your well-known branded shop for lunch over Jimmy’s Meat and Bread Emporium, not just because they know what to expect, but because they’re probably not going to take the risk on a brand new place to keep them well fuelled for the rest of their work day.

This kind of brand awareness is a huge victory in any business, so having it from the go is clearly an advantage.

Con - Lack of control

Franchising is a strange mix of being the big boss, and still having a big boss. You will have a lot of responsibility, yet little real decision-making power. Yes, you’ll hire and fire. Yes, you’ll choose what phone company to go with...probably. But who decides pricing, marketing material, opening hours, even the layout of the tables and chairs, or shelves and products? Although it will vary from brand to brand, more often than not, the answer is ‘not you’.

Those who don’t entirely fit with what has been discussed in our article about Why Entrepreneurship Might Not be for You might find franchising a particularly desirable option.

Pro - Financing

If you as a franchisee struggle, it reflects badly on the brand. Therefore, the franchisor will not sit by and let this happen. While this is helpful in all aspects of the business, most helpful is when it comes to financing. Again, specifics will vary from franchise to franchise, but you can often avail of the brand’s deep pockets to help with startup costs.

For things you can’t get the franchisor to pay for, there are banks. The security and reliability that the well-known brand brings for customers, it also brings to your bank manager’s mind. Banks are far more willing to part with big money when you’re bringing a KFC to a chicken-deprived town than they were when Jimmy explained his Emporium to them.

Con - Financing

As usual, money is both a good thing and a bad thing. With franchising, the franchisor charges franchisees an initial lump sum. There is not really an average example for this, as it varies so greatly from franchise to franchise. Not only is there this sum, but most will want to have a look at your finances to ensure you are suitable for taking on their franchise and not immediately crash and burn.

Although we said above that the franchisor will often help with startup costs, this is equally often not the case at all, and you will be expected to pay for everything from your own pocket (this is where the bank might come in).

Because you are running a branch of the franchisor’s company, the franchisor will obviously take a cut. This comes from actual turnover, not what’s left over after everything has been paid for, so if you want to take home a wage, you need to get the business bringing in a lot of money, and fast.

All in all, then, it can sometimes end up being even more expensive to run a franchise than to start your own business.

Pro - No competition/Network

Franchisors will carefully consider the location you want to open your branch. They will have strict rules about just how far one branch can be from another. This means you won’t find a bigger, fancier Starbucks opening directly across the street from your Starbucks.

Linked tenuously to this is the network of franchisees available to you. These other franchisees have been through all of the same things to get their business running, and you can reach out to them for any help and advice you might need.

Con - Clever line about icebergs and sinking ships

This ties in with the lack of control part, but we have a nice pro, con, pro, con flow going, so here it is. With your own business, the one to blame for the sinking of said business will almost always be yourself. With a franchise, the likelihood of this is substantially reduced. Although you can still blow it, of course, the lack of control you have means that bad decisions at Big Brand HQ can be what sinks the whole thing. And don’t expect them to keep you up to date with their decline. Equally, another franchisee running their branch badly, or doing something particularly bad or stupid could have negative effects felt all across the brand.

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Published on: 5th February 2017